If (when) there is a bankruptcy filing, why 11 and not 7? The simple answer is having the second largest mall operator go into liquidation and throwing 200 million square feet of retail space up for sale would destroy the commercial real estate market. Why? The sudden supply of properties without bidders (loans still are very tough to get) would mean they would have to be placed on the market below "fire sale" prices to sell. Because of that, all other operators real estate values would fall, dramatically, and in turn, causing debt covenants for them to be tripped. That would create a cascading effect on the whole industry. For those not sure, this would be a very, very bad thing. You think you have seen write-downs in home mortgage loans at banks? Force liquidation of GGP and as the saying goes "you ain't seen nothing yet".

It also means the banks holding the loans on the properties would then be forced to take pennies on the dollar, very bad for them. In a Chapter 7, shareholders, debt holders and the industry as a whole suffer. No one wins.

So, if we rule out liquidation. What happens in Chapter 11? Who wins there? Here is what Bill Ackman said yesterday in the WSJ:

Some investors, however, consider a bankruptcy filing likely. Among them is activist investor Bill Ackman of Pershing Square Capital Management LLC, who bought 7.5% of General Growth's stock in recent months and put another 18% under swap contracts in a bet that the company's equity will survive a bankruptcy unscathed. Mr. Ackman also expects to soon get a seat on General Growth's board.

"We think the company will ultimately have to file for bankruptcy, but we think that it's a wholly solvent company with a liquidity problem," Mr. Ackman said in an interview Monday. "I don't think they'll need to dilute shareholders. All they need to do is extend the maturities [in bankruptcy court] and they can refinance those debts as they come due."

Now, one must know that Ackman took his stake AFTER GGP's troubles were known. This is not a situation where we have an investor trying desperately to save a bad investment. He bought in knowing this scenario we now face was likely.

The typical bankrupcty is forced because the liabilities (debt) outsize the assets. In this case the common shareholders are wiped out. But, we know that the assets GGP has are in excess of the liabilities. In this case, even in a worse case Chapter 11, shareholders are not wiped out.

But, this goes even further. Again from Ackman “Most of the time, insolvent companies go bankrupt,” Ackman said. “It’s rare for a solvent company to go bankrupt. This is a solvent company with a liquidity problem.”

General Growth is not losing money. Rents are stable, occupancy rates are over 90% and FFO (funds from operations) remain healthy. What is the problem? Credit. GGP has loan due that they typically just rollover into longer maturities. With the current credit "lock down", they cannot do that. That means bulk payment come due and the cash is not there. It should be noted that this is not an odd situation, this is what REIT's typically do with their debt.

With a Chapter 11 debt holders are put in a room and told by a Judge, "we can pay you all 100% but we need to change and lengthen maturities OR we can liquidate and you can pick up scraps for pennies on the dollar". Here are the new terms. The choice is rather obvious

The banks all recognize this too. This is the reason they have not been paid a dime since late last year and have not forced a Chapter 11 filing. They do not want to take the risk of writing down loan portfolio's. Remember, our mark-to-market world means they just do not just write down GGP loans, they then have to write down ALL of them on their books. Again, this is very bad. So we get endless extensions to pay.

Why? The banks are riding this out. If we get MTM changes in Congress then we may see the log jam break. In that case a Chapter 11 would not have a cascading effect on their whole portfolio and restructuring the loans to again begin receiving payments makes perfect sense. They may be hoping for an economic turnaround late this year that enables GGP to sell some property to pay them off. They may all be playing a waiting game hoping someone restructures and set the bar for the rest of them that is better than a bankruptcy judge will do.

Who knows the exact reason why for each lender. We do know what they don't want right now, a Chapter 11 filing. If they wanted it they could force it easily.

Because of the financial situation of GGP, there is no need to convert debt to equity. Restructuring the loans would allow for payments to be made, equity holders would remain intact, the banks again have performing loans on their books and everyone is happy.....VERY happy.

I think the specter of Ackman going on the board must give the banks pause and perhaps want them to restructure sooner rather than later. Then knowing he wants a Chapter 11 I am guessing will bring people to the negotiating table a bit faster...

Ackman looked like a genius in 2004 when he got a second life with Pershing Square and rode a nice bull market but what's really funny is that his real estate ideas, where his rich dad has expertise, are where he's falling flat on his face. TGT mgmt is like, leave us the hell alone. Ackman made a mistake buying high with options and will never redeem anything from that. It's like waiting for 7+ years from WMT to hit it's all time high, that is what will happen with TGT. And yes, if you go even on this website and search columns you will see those that questions Ackman's TGT play early on.

GGP is really a stupid play if Ackman really just bought the equity he is insane. He believes GGP is solvent, that the value of its malls are greater than its total debt just because some of the land is on the books from decades ago. That's fine but why the hell, in a market as distressed as this, would you buy the EQUITY and take the most JUNIOR position? GGP is defaulting and the lenders will restructure as they see fit, Ackman's Board role will have NO value. I'm really surprised this guy didn't buy up the bank debt, he could have gotten it for $0.10 on the dollar, buy up 34% of a certain class and have blocking rights. For such a savvy investor it's pathetic if that's the case. I realize he's probably invested just a portion of PS into it to maybe have that option type of pay-off in terms of so what if he loses 1% of his portfolio if he makes 20x but that's a big if. He's bought this in the $1-2 range, assuming GGP has value net of creditors that would realize in $40+ in share value? Stupid, he should have bought the bank debt and be a player in the restructuring. Now he'll just be further exposed. Did Tilson buy GGP too (j/k)?

Well Bank of New York is serving GGP with notice of default so Ackman and Todd will get to see how much their equity is really worth in a restructuring. My guess ZERO. And what will do the equity holders are the same instruments that helped Ackman become a legend, CDSs. The CDSs on GGP will put a nice wrench in the claims structure. I wonder if Ackman ever considered that. My guess is hell no.

Dizzy: "The CDSs on GGP will put a nice wrench in the claims structure. I wonder if Ackman ever considered that. My guess is hell no."

Can we be sure that Ackman didn't buy CDS on GGP? I have no idea but I just wonder...

Anyway, some of Ackman's bets are speculative bets where the downside is 100% but the upside is massive. I suspect GGP is one of those investments. I doubt he will lose any sleep over it if it goes bankrupt. (The one that must be worrisome is Target.)

Lhmeyer - you're a lender but it's not just bank debt here, there are bond holders that bought at say $0.30 on the dollar and probably bought CDS as protection. They need close to 100% consent for forebearance from the BOND holders, not likely since with a CDS, i'm alreayd guaranteed to be made whole AND i can swap my discoutned debt i bought in the secondary market for equity in the restructuring. i'm actually really surprised ackman did not go this route.

Citigroup just foreclosed on a set of GGP properties. Another genius play by Ackman. Investment mgmt is the bst business in that it takes just 2-3 years of good returns to bring in real capital to skim and then lose.

Well nearly 60% of bondholders for GGP's 2009 bonds are not taking up the consent solicitation offer. that means they're willing to see it go bankrupt, basically invalidating Ackman's investment thesis.

It is entirely possible the equity doesn't make it through the year (fair chance?). On the other hand, in the case of restructuring, where the equity portion remains intact, GGP's common stock could advance many times its current PPS.

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